Japan as Number One again

Since the sub-prime crisis began in 2008, we've seen story after story on the supposed lessons Japan holds for the US.

Most of these seem to be of use to those who want to push their own political/economic agenda at home using Japan as evidence to support their opinions. On his NYT blog recently, Paul Krugman used Japan as an example of why Friedman's monetarism does not work. However he has not, to my knowledge, used Japan's experience with Keynesian stimulus to claim that Keynesian economics do not work except to say that not enough was done and what was done was not soon enough---just as he says is the problem in the US.*

R.Taggert Murphy has posted a short piece on Japan Focus, Japan as Number One in the Global Economic Crisis: Lessons for the World?, which looks at Japan from another perspective. My short, overly simplistic summary of his piece is that Japan may have been the first country to experience the "New Normal."

*Krugman's blog, his NYT column, and perhaps his ABC This Week appearances are where he pushes partisan political opinion and probably should not be regarded in the same light as his economic work.

Don't worry, be happy

Japan's debt is apx 200% of GDP---the world's largest---but it isn't as bad as it seems 'cause most of the debt is owed to domestic suckers holders of government bonds.

"...Given Japan’s demographics, the current-account surplus may decrease and some even say it will go into deficit” in the long term, Masaaki Kaizuka, director of debt management at the ministry, said in Tokyo today. “We may see the need to increase reliance from abroad, whether we want to or not.” Bloomberg Businessweek

According to the article, Japan's debt may rise to 246% of GDP in 2012. Will Japan still have a AA- credit rating? Will foreign investors care? Will they rush in for the same 1.4% yield on a 10-year bond?

We should refrain from panic because according to Naoki Izuka of Mizuho, the government simply* needs a "feasible, credible and sustainable fiscal plan" and to resolve the problem within 5-years and "we'll be fine."

Nothing to it. A simple thing for any government, but especially the government here, whether led by the DPJ, the LDP, the Commies, or whatever. And we know how welcome foreign investors have been in the past.

*My word, not his.

The Smart Money ain't on Japan

....Smart Money is looking at Japan as the next short because its debt is 100% of GDP, and it will be more difficult to refinance as the population gets older and may need to spend its savings, rather than buy more poorly yielding securities. The cost of shorting Japanese government debt is cheap as interest rates are so low... Forbes

For what it's worth.We've been hearing these sorts of things about Japan, the US and everywhere else for a gadzillion years now. "It can't go on! We can't continue to borrow and borrow and borrow!" But we do.

But if the above occurs sometime in the distant future, what will happen to the US when its one of its two major financiers goes belly up? Will China be able take up all the slack? US taxpayers certainly won't.

China 3

For more on the Krugman (and C. Fred. Bergsten) stand on China and its undervalued currency see The Political Economy of Pressuring China, plenty of links there to Krugman's argument and follow ups and rebuttals by others.

And the un-shut-upable Peter Schiff has posted his YouTube response to Krugman. (Again, I'd advise avoiding the comments.) I never thought Paul could create such entertainment.

We all know C. Fred Bergsten, don't we? For about a gadzillion years he pushed a theory that the Japan-US trade imbalance was a result of an undervalued yen. I once had to transcribe one of his speeches for translators, leaving in all the hmm, huh, eh, and everything else. I lost any urge to read/hear any thing more by C. after that. Krugman/Bergsten video here.

Oops. I found a 1991 C. Fred B./James Fallows spat over his yen theory and more:

Virtually every speech on economics by a Japanese government official or Keidanren (big-business alliance) representative quoted Bergsten or Cline. The purpose of the quotation was to show that the strong dollar was the real cause of US-Japan economic problems, so Americans shouldn't waste their breath talking about other issues, such as trade barriers or deep structural differences between the US and Japanese versions of capitalism. Anyone who has met Japanese economic officials in the last five years has heard Bergsten's work referred to in this way... nybooks.com (Note that Fallows was not questioning Bergsten's integrity. You have to read the full article to understand the argument.)

Natsukashii....

China 2

...The challenge now is how to persuade China to at least moderate its strategy without unleashing something even more destructive. As the decibel level has risen in Washington, Chinese officials have implicitly warned that they could retaliate by dumping Treasury bills from their central bank’s $2.4 trillion cache.

This would be risky for both countries. The move would weaken the dollar and lessen the value of China’s holdings. The United States might weather a sell-off or even benefit from the drop in the dollar’s value, but any precipitous move could further disrupt the skittish financial markets. And Beijing has other potential weapons, like tariffs and quotas. There is no guarantee of rationality in these showdowns. NYT editorial: Will China Listen?

No, there isn't a guarantee of rationality*. There is much more certainty of irrationality in varied doses on both sides. The real question is how the US allowed itself to get into this sort of position to begin with.

Ol' Blinky Ishihara once suggested that Japan dump its US holdings.** According to Blinky, although it would severely damage the US and global economy, in the end Japan and Asia would emerge from the crisis first because that's where all the quality products come from. Apparently nobody took/takes him seriously and relegated him to being a loonytune local-yokel populist (or as the US media tends to refer to the bigot: a controversial nationalist) whose ideas were good enough to get him elected and re-elected. Whatever the reason, we paid no attention.

We still don't. Paul Krugman argues that even if China did dump its US dollar holdings, it would not really have a serious effect. If he is wrong then he personally has a lot to lose....uhhh...well maybe not. Plenty of other economists disagree, but Paul has a Noble Prize. So did Milton Friedman, and I still futilely run outside hoping for money to be dropped every time a helicopter passes overhead.

Anyway, I'll take another wild guess and assume that China, after some displays of irrationality, will ultimately "listen" to some degree. If I am right, I can write a book with a blurb on the rear that reads: "One of the visionary few who predicted that China would avoid a trade war with the US." If I am wrong, I'll claim I work for ABC News and it was simply an unfortunate slip.

Note to self: Must get a life soon.

Note to Google. Google spell check is not aware of the existence of the word "futilely" or "futily". As an American for the US who cannot spell because I had no spelling classes except that I did, I chose the former spelling and then misspelled it. Worse than Google spell check.

*Wait, isn't rationality---according to M. Fujiwara-kun---a Western thing anyway?

**I am not able to find a link. The version I read several years ago was translated to English by a Japanese guy. It should be at least as reliable as an ABC report.

"Japan's Policy Trap" starts to bite

a little (more):

Japan's finance minister said on Monday it is necessary to consider what amount of currency reserves is appropriate as there are differing views on how big they should be.

Naoto Kan told parliament the government cannot easily dip into the reserves to fund its spending as that would involve selling foreign assets and could lead to a rise in the yen. Reuters

Japan's Policy Trap refers to the book of that title by R. Taggart Murphy and Akio Mikuni from 2002:

"...Japan's dollar-denominated trade surplus has outstripped official reserves and currency in circulation. These huge accumulated surpluses have long exercised a growing and perverse influence on monetary policy, forcing Japan's authorities to support a build-up of deflationary dollars. " Book description from Amazon.jp

There isn't much to say to introduce this, except to note that R. Taggart Murphy has written another extremely interesting article for Japan Focus: In the Eye of the Storm: Updating the Economics of Global Turbulence, an Introduction to Robert Brenner's Update*---so interesting that I don't know where to begin. After seeing and living the results of the financial crisis and the resulting economic fallout for the last year, it seems obvious that there are much bigger, more serious problems facing the DPJ and Japan (and the US) than the current Futenma issue. And I'll bet the latest "stimulus" won't change that.

Murphy discusses and expands on Brenner's ideas especially as pertains to Japan, China, and the US.

Just a few excerpts from the article:

...Brenner fully grasps the significance to global capitalism of what has happened in East Asia since the appearance of the export-led, state-directed Japanese growth model...

...“the premature entry of high-competitive lower cost producers, especially in the newly developing regions of East Asia” would have led to serious crisis were it not for the ability of advanced capitalist governments to make available “titanic volumes of credit.”

...the continuation of capital accumulation has come literally to depend upon historic waves of speculation...

Japan had, from the mid 1950s on, deliberately staked its prosperity on the construction of excess global capacity in a series of key industries... ...Japan did not launch industries. Rather, it targeted markets that were already served by existing capacity... ...result was to destroy profitability...

He goes on to examine the current seemingly "bright spot" of China, and notes the country is heading toward the same "Mutual Assured Destruction" financial relationship that Japan and US have due to its up-to-now focus on an export-led economy and the reinvestment of profits into excess capacity and financing of US debt so that the US can continue purchasing those exports.

Now what was it that Obama has been running around the world saying about the world having to put an end to this sort of warped produce and loan/borrow and spend system?

*A link is also provided for Brenner's What's good for Goldman Sachs is Good for America: The Origins of the Current Crisis. At 73-pages, it is a bit long for reading on a computer, but is time better spent than reading about Tiger Woods' non-longer private affairs.

Back to "normal"

Last September, the "greatest financial crisis since the Great Depression" began. At the time, and for months afterward, I thought that the world---at least as it pertains to the US, Japan, and China---had changed forever. You could read about it everywhere which, of course, made it true. The over-consumption of US consumers would stop now and forever; not just until the economy recovered. And the US government? It would have to start paying its own way and stop borrowing from overseas. Taxes would have to be raised.

Japan, which has relied on an export-driven economy for decades would no longer be able to do so with the reduction in consumption in the US. Without the ability to export unemployment rely on exports to the US, it would no longer be able to fund the US party.

I was so surprised (why?) by the developments of that fall and the early winter, that I actually started taking Paul Krugman seriously! (The Obama administration didn't. Points for Barack.) Fortunately, the crisis and the recession seem to be all but over now.

There have been a number of articles in the last 24 hours reporting that Japan may be* coming out of the recession and they point to...sigh...exports as driving the recovery. I guess that's no shock, what else would?

The expansion was in line with the 0.9 percent growth forecast that was the average of 10 economists surveyed last week. A 1.2 percent growth in public demand helped offset a 1.3 percent fall in demand from the private sector, the data showed. Overall domestic demand fell 0.7 percent from the previous quarter.

Recovery in these critical overseas markets whittled down inventories and released some pent-up demand, bolstering Japan’s exports of cars and electronics. Exports grew 6.3 percent from the previous quarter, while imports fell 5.1 percent. NYT

Strangely, for all of the monumental, historic changes that were said to be the likely result of the financial crisis, I can't find much about the US or Japan doing much to prepare for the new world. In the US, we can still have it both ways, government benefits and no tax increases except on some bad guys and the rest will be paid for with cuts in wasteful spending. In fact, they'll "pay for themselves." Bahahahahaha!

We've heard for at least 25 years that these sort of things can't go on forever, but then they do. Kind of makes economics seem like a social science heavily influenced or perhaps driven by political beliefs and a group of folks who---stealing a quote from here--- "think arithmetic is a substitute for reality." Oh wait...did I say seem like?

*A very iffy maybe.

Whadya mean, "may be"

I hope to be resuming regular/semi-regular posts (and life) from now. Below is a post written a few days ago:

The economic outlook in Japan is very grim... Right now, Japan has the worst growth outlook in Asia. That is a surprising fact, if one recalls that this is a country presumably dusting itself off from the collapse of its own bubble nearly two decades ago. After such a long period of economic crisis, Japan should be renovated and ready to thrive. But instead, it may be in worse shape than even the US...Andrew Dewit in Japan Focus.

The US has the ability, we hope, to change direction; to pull itself up in a reasonable amount of time. One needs to chug a lot of sake to believe that Japan, especially as currently governed, has any such ability.

In the same issue of Japan Focus, K. Takahashi writes on the US using and abusing seignorage (the benefits accrued by the issuer of a currency) as "a savior". The article is most interesting for R. Taggart Murphy's response to that argument:

What Takahashi doesn't say is that this privilege has as much to do with Japan's willingness to hold dollars over the past generation as it does with policy in Washington...

...are right that American politicians and central bankers have been unable to resist the temptation to abuse what amounts to seignorage covering the whole planet...

But...does not discuss is the degree of Japanese complicity in the danger Japan now faces...

and

...the domestic political and economic ramifications of a restructuring of the Japanese economy around domestic demand were too frightening to contemplate...Full article at Japan Focus.

Could it be the time to face those fears and actually do something other than whine?